Use the following information to answer questions 1 - 3 Exhale, Inc.
2012 Income Statement
Net sales $9,200
Cost of goods sold 7,600
Depreciation 350
Earnings before interest and taxes $1,250
Interest paid 35
Taxable Income $1,215
Taxes 480
Net income $ 735
Dividends $195
Exhale, Inc.
2012 Balance Sheet
2012 2012
Cash $3,800 Accounts payable $3,420
Accounts rec. 1,100 Long-term debt 350
Inventory 4,100 Common stock $4,200
Total $9,000 Retained earnings 5,830
Net fixed assets 4,800
Total assets $13,800 Total liabilities & equity $13,800
Exhale, Inc., is currently operating at maximum capacity. All costs, assets, and current liabilities vary directly with sales. The tax rate and the dividend payout ratio will remain constant. In 2013, no new equity will be raised and sales are projected to increase by 10 percent. Construct the pro formas for 2013 (at first leave interest and long term debt unchanged). Then answer the following questions.
Projected total assets = $
Hint: Divide each quantity on the left-hand side of the 2012 Balance Sheet by the 2012 Sales to compute the percentages of sales. New sales in 2013 will be 10% higher than in 2012, so compute sales for 2013. Apply the percentages you computed for 2012 to the new sales number for 2013 to construct each line item on the Balance Sheet for 2013. Read off the Total Assets at the bottom.
Projected 2013 Retained Earnings = $
Hint. Proceed by constructing the Income Statement for 2013. Start with the new Sales (10% higher than 2012). Compute Cost of Goods Sold and Depreciation as percentages of sales in 2012 and apply the same percentages to 2013 Sales to get CoGS and Depr for 2013. When you get to taxes, things will be different. Compute the Taxes for 2012 as % of Taxable Income, not Sales, for 2012. Apply the same percentage to the 2013 Taxable Income to get Taxes for 2012. Similarly, compute Dividends for 2012 as % of 2012 Net Income, not Sales. Apply that percentage to the 2013 Net Income to get 2013 Dividends. The Addition to the Retained Earnings for 2013 is equal to the Net Income minus Dividends. Add the Addition to RE to the 2012 Retained Earnings from the Balance Sheet and you have the new 2013 Retained Earnings.
Additional new debt required = $
Hint: You will need the answers of Q1 and Q2, but first you need to construct the right-hand side of the 2013 Balance Sheet. First, Accounts Payable as % of sales, so apply the 2012 % of sales for A/P to the new 2013 sales. Second, leave the LT Debt unchanged. Third, leave the Common Stock unchanged. Fourth, write in the new Retained Earnings from Q3. Compute the Total right-hand side of the B/S. It does not equal to the Total Assets from Q1. The difference is the additional debt to make the B/S balance.